Oracle's Pipeline to Outperform

OVERALL, ORACLE CONTINUED TO EXECUTE and ended fiscal 2007 on a high note.

Strength in the database (particularly options/middleware), growth in Europe, Middle East and Africa (EMEA) division and the Hyperion [acquisition] ($43 million in license revenue) contribution offset lackluster applications license revenue in the Americas and drove top-line upside and earnings per share of 37 cents, which surpassed our estimate of 34 cents. In addition, first-quarter guidance of 18% to 21% total revenue growth outpaced our expectations (excluding Hyperion) by 5% to 7%, which was encouraging.

Although continued execution has led to higher expectations, we believe
Oracle
is poised to outperform in fiscal 2008 based on a robust sales pipeline heading into the first quarter, the upcoming launch of the 11g database (first-quarter 2008), and continued momentum with the vertical applications strategy abroad (particularly in EMEA).

All of which should help offset any lingering concerns about fourth-quarter applications sales in the U.S. Specifically, we believe the retail vertical in EMEA and the communications vertical in Asia should experience notable growth in fiscal 2008. In addition, we believe the company has not made many changes to the current sales territories and quotas, which could also bode well for getting off to a fast start in fiscal 2008.

While traditional first-quarter seasonality could hold shares in a range over the summer, we would look to build positions in Oracle, particularly on any pullbacks, as we believe the risk/reward at 15 times calendar year 2008 EPS is compelling and the fundamentals remain strong heading into 2008.

Oracle reported fourth-quarter revenue of $5.88 billion, which beat our estimate and the consensus estimate of $5.51 billion and $5.61 billion, respectively, as strength in the database segment (particularly options and middleware), growth in EMEA, and the contribution from Hyperion Solutions [which Oracle assumed ownership of in April 2007] ($43 million in license revenue) offset lackluster applications license revenue in the Americas.

EPS of 37 cents easily surpassed our estimate and Street's estimate of 34 cents and 35 cents, respectively, based on high-margin top-line upside and solid cost management. Management noted that 60% of Hyperion license revenue is included in the applications segment, while the remainder is recognized in the database/middleware group.

While overall demand appears robust on both sides of the house, applications-license revenue of $726 million was not the "blowout" that some investors were likely looking for. Excluding Hyperion (about $25.8 million), applications-license revenue would have surpassed our $689 million estimate by only 2%. On the bright side, we believe the company should close some of the "pushed" deals in the first quarter, which are partially responsible for the strong first-quarter pipeline.

We were encouraged by database license revenue of $1.76 billion, which beat our $1.65 billion estimate, as options (RAC, partitioning, etc.) and middleware continued to grow. In addition, the company recorded $2.27 billion in maintenance revenue, which was ahead of our $2.17 billion forecast, and services revenue of $1.08 billion compared to our estimate of $1 billion.

Oracle continued to improve its efficiency, as operating margins of 46.1% increased 157 basis points from a year ago and came in meaningfully ahead of our 44.9% estimate. In terms of first-quarter guidance, excluding the pending
Agile Software
acquisition, but including Hyperion, management is looking for new software-license-revenue growth in the 20%-30% range and total revenue growth in the 18%-21% range on a non-GAAP basis. Management also expects non-GAAP first-quarter EPS of 21 cents and stock-based compensation expense of one cent.

For the full year, our revenue increases significantly to $21.01 billion from $19.40 billion, as we expect continued progress across the business, and EPS increases to $1.17 from $1.10. In addition, we are increasing our fiscal 2009 revenue to $22.95 billion (up 9% year over year) from $21.04 billion and EPS to $1.32 (up 13% year over year) from $1.25.

Our price target goes to $24 from $22 based on 19 times our calendar 2008 estimated EPS of $1.25.

-- Kirk Materne, CFA -- Trey Kuppin -- Jeffrey Constantino, CFA

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